Saturday, May 19, 2012

The One Percent

I'm furious with the 1 percent right now.

No, not that one.

This one: the one-year US breakeven rate, a market expectation of inflation, fell below 1 percent on Friday -- a drop of roughly 1.5 percentage points since March. (Bloomberg's interactive graph is available here; below is a snapshot of the last three months.)


This scares me greatly. Given that the inflation volatility represents a demand-side phenomenon right now, the graph is a clear warning that monetary policy is steering the nominal economy off course once again.

Nor is it just the one-year breakeven. The two-year is at 1.4 percent and falling, the three-year at 1.59, the four-year at 1.73.

Since there is no such Treasury Inflation Protected Securities with durations shorter than five years, economists have nothing with which to compare such T-bills or T-notes to make a "TIPS spread." So instead, this breakeven rate is "calculated by subtracting the real yield of the inflation linked maturity curve from the yield of the closest nominal Treasury maturity," according to the Bloomberg page.

As David Glasner shows us with the five-year TIPS spread, which is also falling, it won't be a long time until such demand-side disinflation translates into downward pressure on stocks in the US. The fall in the one-year breakeven is far greater than Glasner's five-year spread, which suggests that we may be sliding into a "soft patch" or slowdown as we write or speak.

No comments:

Post a Comment